As Russia moves to lure foreign investors, some strategists see the Russian bear as the emerging market bull for 2011.
"There's more than 15- to 20-percent upside for emerging markets, and we think Russia is going to be at the head of the pack. Within emerging markets, it's one of our favorites," said Kate Moore, global equities strategist at Bank of America Merrill Lynch.
Goldman Sachs and HSBC are also bullish on Russia, despite all the risks.
"he 6.5 P/E of Russia's stock market is "nearly half the U.S., which is trading at 13 times. You have to say, 'If we're bullish on growth, and we're bullish on commodities prices, does Russia really deserve that much of a discount?'"
On Tuesday, the Russian government tried to allay fears that it unfairly stifles foreign investment, after years of increasing state interference and regulation. Russian Prime Minister Vladimir Putin Tuesday promised to relax restrictions on foreign investment in some sectors, not long after President Dmitry Medvedev called for an improved business climate.
The pronouncements come as a Moscow court this week declared Russian businessman Mikhail Khodorkovsky guilty of embezzling billions of dollars from his OAS Yukos company. The Obama Administration Monday criticized the Russian government for his prosecution, saying it raises concerns about the Russian legal system and business environment.
"It can be a tough call because a lot of people that got burned on Russia in 2007, 2008 are really reluctant to get back in on this story," said Moore.
"It just feels like 2011 is going to be a good year for Russia. The truth of the matter is a lot of the companies in Russia are good multinational companies. Certainly, some of their management may be at risk because of investigation by the Kremlin, but a lot of that played out already in 2007, 2008, 2009," she said.
Moore said a lot of those that came under criticism had received assets in the post-Soviet years by non-market mechanisms. "Some of the worst is behind us," she said.
Buying Into Russia
There are signs of new investment interest in Russia from U.S. multinationals, including Pepsi's acquisition of Wimm-Bill-Dann, a juice and dairy company. Russia's government commission on foreign direct investment and strategic sectors announced Tuesday that it approved the acquisition.
Just this week, General Electric, the parent of CNBC, also said it was forming ventures with state-controlled OAO Inter RAO UES and Russian Technologies to produce equipment for Russian energy and health care systems.
"Pepsi bought Wimm-Bill-Dann, one of the biggest consumer companies. People think of it as a dairy company, but it has a broader reach. Developed companies are looking at the big growth opportunities, and they're looking at Russia. The consumer culture is somewhat more evolved than China," Moore said.
She also said the equity market is a laggard, and it provides opportunity. Russia is expected to see GDP growth of 4.5 percent in 2011, and its stock market currently has a P/E of 6.5, well below the P/E of 12 for emerging markets, as a whole. "It's nearly half the U.S., which is trading at 13 times," she said.
"You have to say, 'If we're bullish on growth, and we're bullish on commodities prices, does Russia really deserve that much of a discount?'" she said.
"From an equity perspective, Russia was a massive laggard in 2010, both in terms of valuations and in terms of price performance. Russian energy was one of the least loved sectors and it's a major part of the equity index," she said.
"As people look at 2011, fairly bullish oil and commodity prices, and seeing that Russian energy was a laggard, they are rotating into it," she said. Russian stocks were up about 15 percent in 2010, compared to Mexico, for instance, which rose 23 percent. South Africa rose 24 percent.
Moore said besides consumer and energy, technology is an interesting growth area in Russia because the government is paying a lot of attention to it. She also said upcoming local elections this year may also spur more government spending.
"The other part of the macro story is the ruble story. When we look at other currencies, we're actually pretty bullish on the ruble. We have a fairly higher appreciation on the ruble than we have on other currencies," she said.
"We're talking about the economy accelerating from 2010 to 2011 when other emerging markets are slowing down," he aid.
Another likely event in the coming year is that the reserve funds Russia built with petrodollars will be spent, and the government will need to find other ways to fund projects. "That will give them an opportunity for the government to float more debt, and we think there's big demand for emerging market paper," she said.
Where Else to Buy
Moore's global favorites after Russia are India, Singapore and Brazil. Within Eastern Europe, she also likes Poland and is neutral on Turkey.
"Poland could be a sort of decoupling story, especially if contagion drags down Central Europe. It has a fairly more insulated economy, and it could continue to perform pretty well," she said.
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